Date
20 January 2017
Industries such as steel, which are mired in overcapacity, won't find it easy to come out of the woods in China. Photo: Bloomberg
Industries such as steel, which are mired in overcapacity, won't find it easy to come out of the woods in China. Photo: Bloomberg

Will debt-for-equity swaps save China’s overcapacity businesses?

China is planning a debt-for-equity swap program to help companies mired in overcapacity to lower their debt burden.

Now, let us examine if the move will really prove effective in resolving the problem.

First, how bad is China’s non-performing loans (NPLs) situation?

According to the annual results statements of the nation’s 11 listed banks, their combined NPLs in 2015 amounted to 938.8 billion yuan, up 49 percent from a year earlier. The average NPL ratio was 1.56 percent.

NPLs have risen significantly in the past two years. We don’t know how many bad loans are yet to be recognized.

The IMF warned recently that loans with risk potential in China‘s banking system may have accumulated to about US$1.3 trillion, accounting for about 7 percent of the nation’s GDP. It could lead to US$756 billion potential losses for China’s commercial banks.

At the present exchange rate, US$750 billion equals about 4.9 trillion yuan.

After the financial crisis in 2008, Chinese government launched a 4 trillion yuan package to shore up the economy, and has sine then been adopting an easy credit policy.

But banks have become more prudent in new lending as corporate earnings have worsened. As old loans turned sour, the NPL ratio has risen.

IMF said risky debts are mainly in five industries — property, construction, retail and wholesale, mining, and iron and steel.

Given the faltering global economy and reduced demand, companies suffering from narrowing margins and incomes may not be able to service their borrowings.

Actually, all the overcapacity sectors in China carry such risk potential.

Although debt-for-equity swaps may reduce the pressure of rising bad loans for banks, it’s doubtful whether investors will be willing to acquire shares of the troubled companies.

It could be particularly hard for iron and steel and mining firms to attract new money.

This article appeared in the Hong Kong Economic Journal on April 15.

Translation by Myssie You

[Chinese version 中文版]

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MY/DY/RC

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